PCE Inflation Holds Steady at 3.4%, Markets Welcome Softer Print

The Federal Reserve's preferred measure of inflation, the Personal Consumption Expenditures (PCE) price index, rose 0.3% month-over-month in August, below economists' expectations of 0.4%. This puts the annual headline PCE inflation rate at 3.4%, matching July's revised reading and below the consensus forecast of 3.7%

Core PCE, which excludes volatile food and energy prices, rose 0.2% month-over-month, compared with a 0.3% forecast. The annual core rate slowed to 3.0% from 3.3%, below expectations of 3.3%. At 3.0%, core inflation remains a full percentage point above the Fed's 2% target.

Traders see a 52.9% chance that the Fed will leave rates unchanged at 3.75%-4.00% on October 28, according to the CME FedWatch tool. The probability of a quarter-point hike to 4.00%-4.25% stands at 47.1%. Energy was the biggest source of price pressure in August, with prices for energy goods and services rising 2.3% on the month.

Markets welcomed the softer inflation print, with stocks and bonds rallying after the release. The S&P 500 futures rose 0.3%, while Nasdaq 100 futures gained 0.5%. The two-year yield dropped about 4 basis points to 4.84% in response to the news.